Is It Finally The Right Time For Natural Gas ETFs? (UNG, UNL, FCG)

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Is It Finally The Right Time For Natural Gas ETFs? (UNG, UNL, FCG)

June 16th, 2010

I receive more comments and requests for coverage of (NYSE:UNG) (United States Natural Gas Fund) than any other ETF. Bottom pickers have been (without success) trying to get aboard (NYSE:UNG) since its long decline began. Whether at $30, $25, $20, $15, $10 and into the single digits speculators from T. Boone Pickens to Easy Pickens only found Slim Pickens.

The problem has been twofold; government disinterest in the product combined with oversupply. Further, (NYSE:UNG) like other energy ETFs have suffered from contango conditions. This occurs when back month prices are higher than front month as (NYSE:UNG) is required to roll forward contracts from monthly.

Below is the stated objective of (NYSE:UNG) as posted on the sponsor’s website:

The investment objective of UNG is for the changes in percentage terms of the units’ net asset value to reflect the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the price of the futures contract on natural gas traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire, less UNG’s expenses.

From the CME (Chicago Mercantile Exchange) is an abbreviated look at the current price contango:

But now we’re seeing some hope courtesy of the BP Gulf oil spill that has allowed natural gas to leap to the forefront as a readily available and environmentally friendly alternative to oil.

Let’s first look at the natural gas front month contract ($NATGAS) traded on the NYMEX. What you’ll notice here is a similar price decline as demonstrated by (NYSE:UNG) in subsequent weekly charts. The important thing to remember is that comparing the price here to (NYSE:UNG) can be apples to oranges given contango issues and how (NYSE:UNG) is priced in terms of percentage change vs the raw price.

Now we turn to (NYSE:UNG) itself and you can see the long downward pattern that has caused so much pain and loss to any bottom picker.

What we have suggested for many months would be buyers wait until a weekly close above the 22 period moving average occurs. You can readily see this may occur now. But, we should remember other unique factors are at play beyond speculative demand. These include the Gulf spill and the approaching hurricane season. These are factors both political on the one hand and hard to forecast weather issues.

To avoid contango issues the sponsors have listed (NYSE:UNL) (United States Natural Gas 12-month Fund). This issue avoids some of the difficulties associated with the rolling of contracts month to month with the entire asset base by dividing contracts equally over a 12 month period.

But this issue has less history to evaluate from a technical perspective when analyzing weekly charts.

Now, if investors prefer stocks over the product given its unique complexities then there is (NYSE:FCG) (First Trust ISE-Revere Natural Gas Index ETF) which is an equal weighted index of companies that derive most of their revenue from natural gas production.

From a technical view we see little other than a trading range. Naturally FCG can be more subject to the whims of stock market movement than the price of natural gas. Therefore, sometimes the best approach is–if you want natural gas, buy natural gas period.

If you’re looking to finally profit from natural gas, now might present a better opportunity with a variety of choices.

For the ETF Digest, we’ll wait and perhaps make our move next week.